The Fines online service will be unavailable between 11.00pm on Saturday and 5.00pm on Sunday; other online services will be unavailable between 9.00am and 9.30pm on Sunday due to scheduled maintenance. We apologise for any inconvenience.

Summary

This was an appeal to the Court of Appeal against a decision of Justice Gzell in the Supreme Court that the taxpayers were not entitled to the primary production exemption. Justice Gzell found that the cattle grazing use of the subject land did not meet the commerciality test for non-rural land, pursuant to s.10AA(2) of the Land Tax Management Act 1956 (“the commerciality test”).

The taxpayers’ appeal to the Court of Appeal was dismissed with costs. The key findings of the Court were:

s.10AA(2) introduced a more stringent test for exemption than was considered in previous cases (Thomas and Hope) because the words “and substantial” had been added to similar legislative language considered in those earlier cases;

the commercial purpose or character of the use of land used for primary production can only be assessed by comparison with the way in which land is generally used;

the taxpayer was required to satisfy both s.10AA(2)(a) and (b) for the exemption to apply;

the cattle operation conducted on the taxpayer’s land had not, and could not, on any commercial approach, generate a profit or surplus;

in no sense can it be said that the cattle operations had any commercial purpose or character according to normal use of that term;

as s.10AA(2)(a) had not been satisfied, it was unnecessary to consider whether s.10AA(2)(b) had been satisfied.

Background

The taxpayers sought review of land tax assessments for 2006 to 2010 land tax years in relation to ten parcels of land, not all contiguous (“the Subject Lands”), on the basis that the primary production exemption should apply.

The primary production operation was conducted by Antonio Giusti on behalf of Maraya Holdings Pty Ltd (“Maraya”), on the Subject Lands owned by the taxpayers and on additional parcels of land owned by unrelated entities.

The Subject Lands are zoned non-rural and are relatively small in area, being up to 6 hectares in each case. The aggregate taxable value of the Subject Lands was $26,558,700.00.

The Chief Commissioner conceded that primary production (namely the maintenance of cattle) was the dominant use of the land. The question before the Court was whether the cattle operation satisfied the commerciality test in s.10AA(2) of the Land Tax Management Act 1956 (“LTMA”).

The evidence of the taxpayers was that in the relevant land tax years the herd consisted of up to 40 head of cattle; in 2011 and 2012 it was up to 55 head of cattle. The operation consisted of grazing and fattening cattle for market. Mr Guisti spent an average of 1.5 to 2 hours per week, and his son spent approximately 1 hour per week on the cattle operation.

The parties agreed to brief joint experts: Bill Hoffman as beef cattle expert, and Mark Bryant as financial expert. The parties engaged their own experts on drought issues, Mr Glover for the taxpayers and Mr Griffiths for the Chief Commissioner.

Mr Hoffman concluded that the cattle business was unlikely to produce a positive financial return over the foreseeable future, and that it cost more to produce a kilogram of beef than was received when it was sold. Mr Hoffman also expressed the view that the kilograms of beef produced per hectare was a valuable indicator of productivity. Maraya’s beef operation produced on average 42.6 kilograms of beef per hectare, while Mr Hoffman’s peer network of beef producers produced on average 228 kilograms of beef per hectare.

Mr Bryant identified two approaches to measuring financial return: the marginal benefit approach and the shared costs allocation approach. In his view, on neither bases did Maraya attain a positive financial return in the six years in aggregate, but rather Maraya produced a large negative return in each tax year.

Mr Glover's evidence included that the Subject Lands were being used for cattle grazing to their full capacity [32].

At first instance, the Supreme Court held that the beef cattle operation did not meet the commerciality test.

Court of Appeal Decision

Justice Emmett delivered the primary judgment, with Justices Meagher and Leeming agreeing. Justice Leeming gave further reasons in a separate judgment.

The Court of Appeal noted that:

the Subject Lands have a taxable value of $26 million;

the total area of the Subject Lands is 27 hectares;

the greatest profit generated by the cattle operation during the years in question was $1,213 in 2008, although so-called profit calculations excluded holding costs, such as council rates;

The Court held that it is unrealistic to suggest that an assessment can be made about commercial purpose or character of the use of land in the abstract [56]. This can only be assessed by reference to the way in which land is generally used for primary production purposes.

The Court agreed that s.10AA(2) of the LTMA introduced a more stringent test for exemption than was considered in Thomas v Federal Commissioner of Tax [1972-73] ALR 368 and Thomas and Hope V Bathurst City Council [1980] HCA 16 [64], [82], noting that the words “and substantial” had been added to similar language considered in these earlier cases.

As to the nature of the more stringent test, Justice Leeming approved the test set out in the judgment of Gzell J at first instance in determining whether there was a significant and substantial purpose [83]. The Court endorsed the approach by Gzell J in contrasting the small scale and impossibility of profit of the cattle business conducted on the taxpayers’ land with other cattle raising businesses [84]. The Court rejected the taxpayers’ submission that it does not matter that a profit could never realistically be made [86].

The Court rejected the taxpayers’ argument that the language of s.10AA(2) was not intended to alter the earlier form of the exemption, and also rejected the taxpayers’ submission that all that had to be proved was that business as a primary producer was being carried out on the taxable land. The Court held that this contention ignored the clear intention of the Parliament in changing the language in question in order to avoid the vagueness of the original provision, which was being exploited by persons who were not genuine primary producers [65] & [86].

The Court confirmed that the taxpayer was required to satisfy both s.10AA(2)(a) and (b) for the exemption to apply, rejecting the taxpayers’ submission that it was sufficient to satisfy either criteria [67], [86].

The Court concluded that:

the cattle operation had not, and could not, on any commercial approach, generate a profit or surplus [66]; and

in no sense can it be said that the cattle operations had any commercial purpose or character according to normal use of that term [60].

The Court determined that s.10AA(2)(a) had not been satisfied, and it was therefore unnecessary to consider whether s.10AA(2)(b) had been satisfied [67], [87].